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RBA faces the daunting challenge of housing
PUBLISHED: 5 HOURS 28 MINUTES AGO | UPDATE: 4 HOURS 55 MINUTES AGO
RBA faces the daunting challenge of housing
Private investors are using their savings and getting into debt to fund their real estate purchases. Illustration: Sam Bennett
ROBERT HARLEY
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In the year to June, eager housing investors borrowed an extra $40 billion to fund their new found enthusiasm for real estate.
The surge is modest by the standards of past booms but it has been enough to spook the nation’s financial regulators.
The Reserve Bank, the Australia Prudential Regulation Authority and the Council of Financial Regulators are working to slow the growth in investment lending.
What they do will have implications for new housing investors seeking a loan, and for all those existing investors keen to see the value in their assets grow.
On Friday, ANZ Banking Group chief executive Mike Smith warned investors saying “If anybody believes that housing prices should continue the way they have the last few years, (the RBA) have been saying very clearly this is not going to happen,” he said. But if the regulators know what will happen,they are not “ruling anything in or out.” Before a Senate Committee on Thursday two key Reserve Bank executives, assistant governor Malcolm Edey and the head of financial stability, Luci Ellis, looked like the parents of an 18-year-old birthday girl.
They just want to slow the alcohol, not stop the fun. And only to protect one or two friends who, you know, get a bit silly.
But just as an 18th birthday party can be hard to control, so too can a housing boom. Too light a touch and nothing happens; too heavy a hand and the much needed increase in housing supply will grind to a halt.
The regulators, says Edey, will likely make an announcement by year end.
In the meantime, the experts are assessing the options from a subtle tightening of lending requirements to the heavy hand interest rates or taxation changes.
Mark Hewitt, the general manager of sales and operations at the largest mortgage broker, AFG, says the RBA is, in the first instance, trying to talk the market down.
“At the moment it is more jawboning,” he says. “The regulators are keeping an eye on things and if it gets out of hand they will have to take action.”
In this view, the RBA is taking a well trodden central bank line, talking tough in the hope that nothing more needs to be done.
On AFG’s numbers, the tactic is not working, at least not yet. In September, AFG, with 10 per cent of the market, wrote a record $1.7 billion in investment loans.
At the same time, the proportion of investment mortgages with loan to valuation ratios above 80 per cent rose to 60 per cent.
STANDARDS HAVE NOT LOWERED
Nevertheless, Hewitt says the banks are holding their lending standards. “They have not tightened them, but they have not loosened them,” he says.
The RBA has a similar view. In its September Financial Stability Review, the bank noted the signs of competition like larger discounts on advertised variable rates, fee waivers, up-front cash payments to borrowers, and higher bonuses for mortgage brokers.
The key safeguards are in place. “In aggregate, banks’ non-price lending standards, such as loan serviceability and deposit criteria, have remained,” wrote the RBA.
The next step in regulation would be to tighten some of those non-prime lending standards. Edey says the aim is to “target the high risk and problematic areas of housing activity”.
The obvious place to start is on the “buffers” which the banks use to ensure that the loan can still be serviced with a rise in interest rates.
Today the banks are buffering for a rise of around 200 basis points. Another 100 basis points would have a marginal impact.
The next step would be to restrict loan to valuation ratios, as has been attempted in New Zealand. Across the Tasman, the policy had the unintended consequence of cutting out first home buyers instead of investors and the RBA appears to have ruled it out.
Another step would be to toughen the loan to income ratio controls, as the Bank of England has done in the past. Once again the consequence might be to hit first home owners rather than investors.
The last way to target non-price lending criteria might be to set geographic rules. Again the RBA appears to have ruled this out. In the past, the banks have controlled lending by avoiding oversupplied postcodes or worrisome property characteristics.
In the 1990s, lending to inner city postcodes, like Melbourne’s 3000, was restricted as was lending on apartments of less than 50 square metres in size.
Today, despite the plethora of warnings about an oversupply in inner Melbourne, the banks still seem to be lending, At the same time, mortgage brokers note that lending to areas linked to resources, like the Pilbarra, is being restricted.
STRUGGLE FOR CONTROL
In essence the RBA and APRA face a daunting challenge to find the right mix of such controls.
Beyond the nation’s housing market other changes are taking place, both nationally with David Murray’s Financial Systems Inquiry, and internationally, in response to the financial crisis, and these might give the regulators more clout. Adjustments to the capital adequacy rules are under discussion, which could make investment loans less attractive compared with owner-occupied and business lending.
But those rules do not apply to the non-bank sector. Investors, keen to take advantage of mortgage rates at long-term lows and rents at long-term highs, could look elsewhere for their finance.
One key watcher of the mortgage sector, Martin North of Digital Finance Analytics, says the regulators have chosen a “hard nut to crack”.
“Its been created by many years of bad policy,” he says. “The real key to long-term adjustment is supply side initiatives which are more state than federal.”
Sledgehammer tools do exist.
The big one is a rise in interest rates. A new survey of economists by comparison website finder.com.au points to a first rise in rates in June 2015.
The Abbott government will also come under pressure to change the rules on negative gearing through the white paper on Reform of Australia’s Tax System.
For potential investors looking for a loan, this might be the best time to move.
The Australian Financial Review
BY ROBERT HARLEY